I think you are going at this a little backwards. You must know your costs - direct and indirect. Salaries included. Everything included. This will get you to a number (lets say monthly) that can be divided by the number of shop hours worked each month, to generate a dollar amount that is your cost. Mine is a simple $58.00 per hour, without anything for me. I charge $100 per man hour. But I do not get the remaining $48.00 per hour. I do a lot of 'free' work to keep the shop running smoothly and efficiently.

I have not yet found anyone to pay me for my time on Woodweb.....

The hourly rate of costs is what is needed, minimum, to keep the doors open. The minimum you need to charge, per hour, to continue on. Now if you would like to have 10% profit, add that to your total costs, and use it for estimating/pricing future work. 20% profit, do the same.

I'm intrigued by this one. I think at the end of the day this is the figure that really matters for most shop owners, assuming they are busy. I'm going to go out on a limb and say it varies drastically. A one man shop is going to be higher than a large shop, but the volume will obviously be different. Someone who outsources will be lower than someone who does not.
I'm always shocked at the difference in pricing and ways of doing things.

My apparent alter ego has a completely different way of doing things and yet it works for him. I'm sure there are hundreds of other stories here on Woodweb and it's working for them. There is certainly a lot of variety on how we approach and run our businesses.

Alfred, for all anyone knows, I may be the only one on the forum, furiously typing away. Asking questions, giving answers, arguing with myself, and giving plenty of praise, with a bit of criticism every now and then.

But as for my original question - I mean the O P's original question, Profit is after costs. Whether those costs are for in house, shaper made cabinet doors or outsourced doors has little impact on the total costs. That is, if a door requires 3 hours at $100 per man hour to make, or can be bought for $200, with a 50% mark up, makes no difference to the total cost. Unless the cabinetmaker does not know to mark up materials.

I don't see the drastic variation. 10 man shop making everything, vs a 2 man shop doing nothing but offloading trucks and repackaging to ship out can both have the same sales numbers per month/year, but get there quite differently. Now we can go backward and say the two shops will have the same costs - money going out the door - whether to DoorCo or to Fred and Wilma employees.

Neither has anything to do with profit. Profit is only after all else is tallied.

Shop Owner,
I have a 3 man shop. I average around 450k gross. I pay myself $75k salary. The "profit" I take out as a distribution since I'm an S corp. It's typically around $50k. That would be a 11% profit margin, assuming that I could hire someone at $75k/year to do my job while I walk away.

I think any shop under 10 people or so, you really can't talk about "profit margin" because the owner is typically so embedded in the company that there's no way to replace him and see what profit there is without the owner involved.

I have had years with no profits, paid every bill, paid 401k, bought equipment and had more cash in the bank at the end of the year than at the beginning. so I had a 0% or negative profit, yet my adjusted EBITA would be a positive number.

I guess the real question is what is the OP trying to measure and why?

Last year profit was 27,145 on sales of $255k or 10.6%. That includes $6500 worth of 179 equipment purchases, and also $20/k a year on machinery lease payments. One employee who's annual payroll cost is $29k. I do not pay myself a salary, but did take draws comparable to the $27k profit.

Profit numbers can be skewed. The middle of December I purchased a container load of wood and expensed it. However that $15k is still sitting in the shop, just in the form of wood and not cash.

While every business owner needs to know his costs, I fully disagree about using cost plus pricing. It's stupid. The reason you're in business is to make as much money as possible. Why would anybody in their right mind limit their earning ability by using such a system that would only only them to profit 10% or 20% on every sale??? Your selling price needs to be as much as the market will bear. Whether you choose to go the sell higher and do less volume, or sell lower and sell a whole lot more is up to you. Get as much as you can without ripping people off.

Put it this way. If you bought Microsoft stock in 1980, would you be ok with just a straight line 10% annual return, or would you want the 1000's of percent it has increased along with all the stock splits as well?

Jerry,
Seems you are adamant about your pricing, and not using cost plus. So why do you price your work so you only made $27,000 per year? I found that the stress and long hours of running a business is not good on one's health. So why do it for such little money. Don't get me wrong, I had years like that too. But after 8 years of it, I closed up and went for a corporate woodworking job to make a real living with a pension plan.

We're not a "custom high end" cabinet shop. We produce a set product line of residential furniture. We sell online only and ship all over the country. If our price isn't competitive the customer will just order form Amazon, Ikea, Target. I can't tell the customer I want to make $100k a year without working harder, so I have to charge you double the price. The market sets the price.

My only constraints now is how to grow sales, that's how I make more. If I were to only double my sales the profit would be close to $100k, as my fixed overhead costs are about $80k a year (rent, utitilies, machine payments etc). However I can't just go out and double my prices or my sales would be zero. I've raised prices about 30% over the years and the volume has gone down significantly and sales have been flat.

Figuring out how much you make is tricky. I just closed out my books finally for last year.

$245k in gross sales.

I spent $45k on equipment. Not including tooling or parts.

Paid out $28k for seven months of rent for the building I own and lease back to the company.

Paid myself $10k (only worked 3206.7 hours for it....)

If I could stop making payments on the building, and stop buying equipment I'd be content with my income, though less hours and more money would be welcome. I'm hoping in five or six years to get there. Though after I get the building paid for, I want to build another for rental space and cash flow it with the cabinet shop unto it can stand on it's own.

Jerry,
I just don't agree with "market sets the price". There are always ways to separate yourself from the market. And those ways can even be a perceived value if you do the marketing right. I just feel you are selling yourself short running a business for that kind of short money! You don't have to be custom high end to make good money. Working smarter has always trumped working harder.

I agree with get the most you reasonably can for your product. For example sake I make a Toyota Camry. I can't just cry a sad song to my customers and tell them they have to pay me a Mercedes Benz S500 price for my product just so I can make more money without doing any more work. Nor am I going to trick my customers and make them think they're getting a Mercedes when in fact it's a Toyota. I could go out and try to make a Mercedes Benz thinking I'll make more money, but have no desire to do so. I cringe when I think of people on here who have to meet with customers, do CAD drawings, send to engineering, get approvals etc. My customers click the Buy Now button and the money is in our bank account the next day.

The only thing holding me back from making more money is I'm at that growth plateau. I need to increase sales, but just about maxed out keeping up with them without hiring more. Since we sell 100% online I need to hire someone who is a great digital marketer/social media content creation etc. These days people don't wan to buy a product, they want to buy a brand. And it's way more work creating and maintaining a brand than it is making the product!

Keep in mind my number was $27k because I stocked up on materials at the end of the year and expensed them. There as $15k in wood, and about $5k in packing materials etc. I also purchased other small machinery and 179 wrote it off along with other investments in tooling. The company pays my cell phone bill, WSJ subsciption etc.

Other than my lease payments I have zero debt, and I don't really work crazy hours anymore. Or am I crazy thinking 10hr days isn't that much?

The $15k year end wood expense wasn't a tax ploy, it's a reality of being in business. I purchase my wood overseas by the container load. It was paid for the beginning of Q4 and arrived mid-December.

You're definitely right as to how skewed "profit" can be. Some people cry the blues that business isn't profitable yet they're taking $100k+ salaries, company cars, paying themselves high rent on personally owned property leased to the company etc.

Inventory is considered in your accounting as an asset and so it shows up as a gain and is therefore subject to tax. I should say your inventory shown last year compared to this year. It is only an expense when it has been used on a billable project. Watch out for the IRS.

Inventory (wood) is an asset on the balance sheet. However I don't sell wood retail. I sell furniture products that are made from the wood. Therefore when I purchase a container of wood and use it in less than 90 days of purchase it's a materials expense. It gets written off just like any other business expense does. Nobody on here seriously pays taxes on materials purchased do they?

Jerry,
Any manufacturer with inventories over a certain amount (used to be 500k) has to use the accrual system so that 15k would either be allocated to job as an expense and if not billed would be sitting in WIP or would be inventory, either way its taxable, and yes we pay tax on both every year (we don't pay sales tax on materials). IRS also tacks on OH to WIP.

Generally profit is what is left over after everyone and every bill is paid and every dollar received.

Profit is a lot of things, being in business has different goals for different people.

We want to make a profit and be competitive in the marketplace, we don't want to sell to low or too high. The more we risk, the more we should make. I certainly don't want to buy a job.

That's a very nice salary in itself, yet alone still having $50k left over to either distribute or make a 179 purchase if need be. What do some of your other expenses look like as a percentage of sales?

Does your 3 employees include you as one of them? Are the other 2 shop workers, or do you have office/admin help as well?

Firstly, I'm not an accountant. Especially not a Tax Accountant. And, I did not even stay in a Holiday Inn Express last night.

However, I always heared that "if you maintain inventory you must use the accrual system". Fact? I don't know. I don't actually care. We have inventory and use the accrual system. If someone wants to use cash basis that's on them. Just be aware that you may be skirting the law and end up paying for it.

As for total "profit", over the last three years we have seen 2.1-2.4mm gross sales, and EBITDA + owner's salary has been running 21-26%. For a long time it was in the 10-12% range, but getting debt paid down, buying more material by the TL direct from mills, and finding more efficient ways of running jobs have finally turned things around.

For instance, we currently have 11 full time employees, down from a peak of 13, and yet we are doing the same sales volume. We used to pay $1710/M for 4/4 S&B Basswood, the last couple loads we've bought at $1340-1390. At one point we were paying $40-50k/year in interest; last year it was under $10k.

The amount of money I pay to the IRS and State leaves me incredulous every time I write the check. Almost even more incredulous than the fact I have the cash to do so. Our tax picture is not quite as horrific as it might seem at first glance, as we generally do a major upgrade every 1-2 years, so we are able to take full depreciation in the year of purchase under the Bonus Depreciation rules (we can't use section 179 because our equipment is purchased by a separately owned leasing company and we lease it from them. But the effect is the same).

And as far as cost plus pricing, I wouldn't say it's stupid, although it is limiting, and if you can accurately determine "what the market will bear", you may well come out ahead. I will also say that there have been plenty of companies that figured out what the market would bear, said "oh, yeah, we can do that" and find out in the long run that A) the Market price was ill conceived or B) their anticipated costs were. Cost plus may be playing it safe, but for me, securing a future for me and my family is more important than becoming the next Bill Gates.

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